RISK IN CAPITAL BUDGETING DECISIONS
The risk is prevalent in all business decisions, but it is much more in capital budgeting decisions. The risk should be assessed by the firm before it invests money in any long-term investment projects. There are different sources of risk, some of them are as follows,
SOURCES OF RISK
# Project Specific Risk
The earnings and cash flows of the project may be lower than expected because of estimation error or some factors specific to the project like the quality of management, etc.
# Competitive Risk
The earnings and cash flows of the project may be affected by unanticipated actions of the competitors like new product innovations, discount offers, etc.
# Industry Specific Risk
Unexpected technological developments and regulatory changes that are specific to the industry to which the project belongs will have an impact on the earnings and cash flows of the project as well.
# Market Risk
unanticipated changes in macroeconomic factors like the country GDP rate, market interest rates, and inflation rates, etc have an impact on all investment projects undertaken by the company.
# International Risk
In the case of the foreign or multi-national projects, the earnings and cash flows may be different than expected due to exchange rate risk of currencies, political conditions of the countries, etc.